Deciding whether to lease or buy your next vehicle is an important decision that you’ll have to live with for the next few years. Carefully consider the positive and negative points before you sign the papers.
There are advantages to both leasing and buying a vehicle. When you lease a car, truck or SUV, you know that you’ll probably never pay that vehicle off. At the end of the lease term, you’ll likely be given the option to purchase - though most people don’t. However, the biggest benefit of leasing for most people is that at the end of that lease agreement, you’ll be getting a new car and start over with another lease term.
Basically, a lease allows a person to “rent” a vehicle for a specific amount of time. During that time, the person makes monthly lease payments that are similar to a monthly car payment. At the end of the lease term, you pay a balloon payment to keep the car or turn the car back in and start a new lease on another car. The downside for most people is that it’s a perpetual car payment – you never have a time when you aren’t making that monthly payment. With a purchase, you would eventually pay the car off. A lease may also require a sizeable down payment and the amount of that payment should be considered when deciding whether the car is worth the cost.
A lease also eliminates the possibility to customize the car. Adding anything that can’t be simply removed at the end of the lease is usually prohibited by the terms of the lease.
There are usually some additional terms to the lease that require the holder of the lease to have regular maintenance performed. The maintenance cost may be included in the lease so there’s no charge for the routine things like oil changes.
The number of miles that can be driven is also limited. If you drive more than your allotted miles, you will be charged for the additional miles.
Sometimes, the credit requirements for a lease agreement are less stringent than for purchase and you might find that you qualify for a lease when you can’t qualify for a new car purchase.
Remember that different terms and conditions will apply to different situations. The only way you can be sure of all the regulations that will be included in your lease is to talk to the leasing agent and then carefully read the contract.
Steps
Determine the most you can afford for a monthly payment.
Review the different new car options and decide which vehicle you want.
Calculate the monthly payment for a loan versus lease. Does it meet your payment limit?
Estimate the likely value of the vehicle at the end of a loan term (e.g. how much is it likely to be worth in three years?) Are you ok with losing this "residual" value?
Estimate the number of miles you drive per year. If it's more than 12,000, you will probably be better off buying. Most leases have a 12,000 mile per year limit with large penalties for overage ($0.25 to $0.50 per mile on some leases!)
Negotiate the price of the car before the financing decision.
Review the options with a neutral third party - not the dealership's finance guy. They are motivated by SPIFFs and commissions, not what is right for you.
Tips and Tactics
Don't be afraid to walk away from a dealership if you don't think you're getting a fair deal.
Look at late model cars, you might save money on a car loan on a late model car versus a lease on a new model.
Don't forget the down payment! You might see a lease for $199, but what you don't know if there is a $4,000 down payment. If you divide that out over a two year lease, that's like adding $167 a month to the payment.
Oftentimes, you will owe more on a leased car than it is actually worth. You can cover the difference with "gap insurance." This can come with the lease or separately from your insurance company. Find out the cost of gap insurance before making a commitment to a lease.
Keep in mind - you can also lease a used vehicle. You may want to talk to the dealer about leasing a one or two year old used car on the lot. Your payments will be lower as the initial hit is already taken by the first owner. Don't lease something too old or you might be stuck with a piece of junk in a year or two.
Lease a car with an expected high residual value. At the end of the lease, the car has what is called the "residual value" - what it is worth at that time. If you pick a car which is expected to hold its value (think Honda or BMW), than you have the option to purchase the car at the end of the lease and it may be worth the purchase.
